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For the 7th straight week, the US oil rig count has plunged (down 53 to 325). This is the biggest drop since the 2015 collapse and the same total oil rig count first seen in 2006…

And while U.S. shale oil producers have so far held up admirably, hanging on for dear life amidst the biggest oil demand collapse in history. the rig count collapse may signal more trouble ahead as American producers continued to pump at record highs in March, even after dozens of drillers laid out blueprints to limit production. 

But, as OilPrice.com’s Alex Kimani notes,  with U.S. storage about to hit tank tops in a matter of weeks and the world deep in the throes of the biggest pandemic in modern history, the inevitable has begun to unfold: The arduous and costly process of well shut-ins.

Oil production in the country tumbled sharply to 12.2 million bpd in the third week of April, a good 900,000 bpd less than the record peak of 13.1 million bpd recorded just a month prior. That’s a 7% production cut in the space of only a few weeks and the lowest level since July.

A lot more could be on the way.

More Production Cuts

Oklahoma-based Continental Resources (NYSE:CLR), the company controlled by billionaire Harold Hamm, has ceased all its shale operations in North Dakota and shut in most wells in its Bakken oil field totaling roughly 200,000 bpd. 

The company, though, has refused to sell its contracted oil to pipelines at negative prices by declaring force majeure.

Continental has defended its stance by pointing out that the coronavirus outbreak has “…brought about conditions under which force majeure applies” while adding that selling its oil at negative prices constitutes waste.

Continental made the risky gamble of betting that economic growth would lift prices and, therefore, left itself heavily exposed to low oil prices by failing to employ the industry’s usual playbook of hedging future production with derivatives.

Continental is in good company, though.

Rystad Energy via CNBC has reported that six major U.S. shale producers will shut another 300,000 bpd of crude in May and June. That’s ~100,000 bpd more than April cuts, thus bringing the country’s total production cuts to 1.2 million bpd. The cuts will come from Continental Resources, ConocoPhillips (NYSE:COP), Cimarex Energy (NYSE:XEC), Enerplus Corporation (NYSE:ERF), Parsley Energy (NYSE:PE) and PDC Energy (NYSE:PDCE).

Continental Resources is set to slash 69,000 bpd in April and nearly 150,000 in May and June while ConocoPhillips will lower output by 125,000 bpd of oil equivalent, including 60,000 bpd of oil.

Rystad’s head of shale research, Artem Abramov, has estimated that the biggest shale fields–Permian, Eagle Ford, and Bakken–will cut a further 900,000 bpd, 250,000 bpd, and 400,000 bpd, respectively, throughout 2Q20, with shut-ins accounting for a staggering 60% in the early stages.

Expensive Shut-Ins

A well shut-in is considered a drastic action of last resort mainly because it can result in huge or even total loss of production.

That’s a big consideration in these dire times, where even oilfield values are descending into negative territory due to liabilities such as plugging wells and land remediation.

Chris Atherton, president of EnergyNet, a company that deals in oil and gas operations, undeveloped acreage and royalty interests, has told Forbes that oilfield prices have tumbled from an average price of $42,000 per net flowing barrel per day when oil prices were around $60/barrel to under $20,000 currently. Buyers started getting picky and sellers more desperate in 2019 when oil prices were still relatively high.

Things have gone to the dogs now, with a shut-in field fetching only half the price of a virtually identical field but with oil still flowing.

As Bob Bracket of Bernstein Research revealed last week, “Shut-ins are not easy decisions. When production shuts-in, problems arise. Multi-phase well flows begin to separate out, while problematic hydrates, waxes, asphaltenes form which will have serious economic implications,” citing numerous examples of fairly large wells with flows exceeding 1,000 barrels/day that could not be brought back to life after being shut-in.

That’s the main reason why even heavily indebted shale companies, including bankrupt ones like Whiting Corp. (NYSE:WLL), insist on continuing to pump at all costs.

California Resources Corp. (NYSE:CRC) is a $133.7M (market cap) company drowning in debt to the tune of more than $4 billion due by the end of 2022. The company’s average all-in cost per barrel of $35 means that it’s losing ~$20 for each barrel of crude it pumps. Yet, the company is unable to shut-in its wells because they require a continuous injection of steam to keep them alive.

Deal Mania

A shut-in well is a tough proposition for a prospective oilfield buyer, too, because it’s hard to determine how much oil can be coaxed out, especially after a lengthy layoff.

The only solace for the beleaguered oil sector is that there probably won’t be a shortage of takers when the worst is finally over.

Atherton says that his company has 40,000 registered users with access to $17 billion in cash ready to make deals. He has predicted that distressed companies will “turn into a flood of assets available” in a year or so.

The bottom hunters will certainly be waiting to pounce, the downside being that many investments in the space could turn worthless due to the swelling wave of bankruptcy.

Now that the USO has been terminally crushed and all those 220,000 Robin Hood bottom-chasers have suffered catastrophic losses…

… Goldman – which several weeks ago correctly predicted that the price of landlocked oil such as WTI could turn negative – is turning bullish.

In a note from Goldman’s Damien Courvalin, the energy strategist writes that “oil fundamentals are finally showings signs of improvement, likely accelerated by the recent historic collapse in prices” as “supplies are declining quickly, with signs of demand improving even ahead of lockdown measures being eased.” And while the inflection into a deficit is still a few weeks away, “it now appears likely that the market is passing its test on storage capacity.”

Some more details from the Goldman note on the key topic of storage:

To be clear, the physical oil market is still in surplus and the inflection into a deficit is still a weeks away in our view. But, it now appears likely that the market is passing its test on storage capacity, due to improving fundamentals (inventory builds appear to be slowing), new creative forms of storage being put in place (rail cars, old pipelines, more boats) and a likely c.1 mb/d smaller May surplus than previously expected (mostly due to a faster demand rebound). As we have shown previously, physical prices typically offer the best insight in periods of extreme fundamental uncertainty, and strengthening cash assessments for US crudes suggests that production cuts are likely staving off local storage saturation. With the market rebalancing now in motion, we expect a three-stage oil price rally, from relief, to cyclical tightening, and finally structural repricing.

And so, with the market’s rebalancing now in motion, Goldman expects a three-stage oil price rally, from relief, to cyclical  tightening, and finally structural repricing. With financial crude futures markets set to trade July barrels in just a couple weeks, Goldman thinks that the recent rally can extend further in May, back to cash-cost levels ($25/bbl for WTI), albeit with still-high price volatility. It wasn’t clear if this volatility potentially includes another negative price moment this month when the prompt contract again goes negative if there is incremental supply and no storage to put it in.

That said, beyond this relief rally, Goldman cautions that the oil bull market that we forecast will take time and require patience. The key issue, as everyone saw on April 20, is that oil remains a physical asset and will therefore need to first price to clear the substantial inventory overhang through 2H20, leaving the commodity to lag the rally in related anticipatory financial assets like equities.

Looking further ahead, Goldman’s updated 2020 and 2021 global oil supply-demand balance continues to point to a record large surplus in 2Q20 of 8.6 mb/d and an unprecedented peak build in global oil inventories to its effective maximum capacity of c.1,200 mb. However, in a change from its previous dismal projections, the bank now forecasts that lower supply in 2021, due to higher decline rates, will more than offset a  more cautious demand outlook, putting the global oil market in a persistent deficit from 3Q20 onward.

With OPEC initially leaning into this deficit, we expect that the inventory overhang will normalize by the end of 2Q21. At that point, we forecast that core-OPEC and Russia production will finally exceed their 1Q20 level with a restart in shale activity also needed as the 4Q21 deficit reaches 1.2 mb/d and inventories fall well below average levels.

In many aspects, this fundamental path is similar (although faster and more violent) to that which occurred in 1998-99 (when an OPEC market share battle occurred as the Asian crisis hit global demand). In particular, the lasting impacts of the sharp upstream capex cuts in 2020 should finally enable OPEC to both increase production and market share in 2021 and presages a return of a necessary new investment phase in upstream capacity in coming years.

Surprisingly, while Goldman is clearly turning more bullish on oil after the “violent rebalancing”, it is are downgrading its 2H20
and 2021 demand forecasts despite observing a “demand restart which is surprising to the upside.” Goldman now expects 4Q20 demand to still be down 5 mb/d from pre-virus levels (with 2021 demand still 3.6 mb/d impaired). Beyond: (1) the impact of lower incomes (assuming a normal relationship between GDP and oil  demand), Courvalin now also assumes persistent demand impacts from (2) the disproportionate transportation hit (over GDP) of lingering isolation measures, (3) a
lasting impact on cruises and jet demand (consistent with SARS and 9/11 with half of jet demand also business-related), and finally (4) a permanent change in behavior such as working from home (with c.9 mb/d of oil demand for commuting). The impact of each of these four factors is -2.1/-0.75/-0.95/-1 and -0.9/-0.2/-0.5/-1 mb/d in late 2020 and 2021 respectively.

Yet while demand will demand depressed, what is more important is that supply cuts are finally kicking in:

Public announcements of global production shut-ins (outside of the OPEC+ cuts) amount to c.2.2 mb/d, with the actual number likely larger given the lack of disclosure by NOCs and private producers. This suggests that the market is progressing towards our estimate of 3.5 mb/d of shut-ins required at the binding effective storage constraint in April-May. This shut-in target is 0.5 mb/d smaller than previously, given slightly higher estimated demand and storage capacity (with evidence of marginal forms of storage being created due to extremely low prices).

As expected, shut-ins are mostly occurring among inland producers (US, Canada) where storage constraints have been the greatest due to the decline in local refinery intake. Key to the market rebalancing in 2021 will be which fields remain impacted, as this would reduce global production capacity. For example, shut-in production in low pressure conventional reservoirs may be vulnerable to damage, requiring either prohibitively expensive workovers or leading to higher GORs. As we  await greater clarity on such permanent impacts, we conservatively assume that only 500 kb/d of these shut-ins is lost in 2021, with the remaining 3.5 mb/d of shut-ins unwinding mostly through 3Q20

In any case, once we get to the cyclical stage of the recovery, Courvalin expects the inventory normalization process to first drive a flattening of the Brent forward curve around $30/bbl in 3Q20. As the deficit grows, this will be followed by a steady move higher in spot prices due to a steepening level of backwardation through 2Q21.

Eventually, in a world where the only cure for high oil prices are low oil prices, the higher decline rates, sticky shut-in capacity losses (then again one wonders just how “sticky” shale shutdowns are) and a much higher cost of capital for the industry will finally set the stage for both higher OPEC market share and prices, the structural consequence of the ongoing violent  rebalancing, leading Goldman to raise its 4Q21 Brent forecast to $65/bbl (from $60/bbl).

Meanwhile, to patiently trade the oil recovery, Goldman recommends entering two new trades. First, a long Dec-20 vs. Dec-21 Brent timespreads position, to capture the shift of the forward curve into backwardation.

Second, it recommends entering a long 3Q21 RBOB gasoline position which should also benefit from consumers’ preference for cars over subway, buses, and planes.

After one of the worst mass shootings in recent Canadian history in April (leaving 22 people dead), Justin Trudeau has made a shock announcement on Friday afternoon that his government has banned assault-style weapons, reported The Guardian.  

“These weapons were designed for one purpose and one purpose only: to kill the largest number of people in the shortest amount of time. There is no use and no place for such weapons in Canada,” said Trudeau.

“Effective immediately, it is no longer permitted to buy, sell, transport, import or use military-grade assault weapons in this country.”

The mass shooting in Nova Scotia last week has been deemed the worst shooting in the country’s history and has given Trudeau the cover to “strengthen gun control.” This was one of his major campaign promises, and he has seized the opportunity in a crisis. 

The new ban is expected to prevent shootings like the one in Nova Scotia. The Royal Canadian Mounted Police believe the gunman did not have a license to purchase the weapons used in the shootings and were likely obtained illegally. 

Trudeau said there would be a two-year “amnesty period” to allow current gun owners to comply with the law. The ban covers more than 1,500 models. 

In 2015, Trudeau promised that a Liberal government would restrict gun owners from certain types of rifles, including “military-style assault weapons.” 

“As long as Canadians are losing their loved ones to gun violence, not enough has changed,” Trudeau said in September. “We know you do not need a military-grade assault weapon, one designed to kill the largest amount of people in the shortest amount of time, to take down a deer.”

Currently, Canada’s Firearms Act does not make a clear distinction between “military-style” weapons and long guns. The new law will clear that up.

According to a poll from the Angus Reid Institute, 80% of Canadians support the ban. However, there will be an uproar in the gun community that will see this latest gun grab as entirely unacceptable. And, keep in mind, the ban on assault-style weapons is coming during a virus pandemic. Is there are a larger agenda at play?

As with any piss-broke society that functions purely by taking on massive amounts of debt via money printing to try and keep itself afloat, the next obvious step after Central Banks make “loans” by printing money, is inevitable defaults.

It looks like that’s exactly what the U.S. government is now gearing up for with regards to loans they made just weeks ago and are continuing to make. 

The administration’s Small Business Administration’s Paycheck Protection Program launched its second round on Monday, which allowed lenders to issue forgivable government guaranteed loans to small businesses affected by the coronavirus outbreak. Or, maybe just to anyone that fills out an application. We don’t really know – the oversight has been a bit shaky to say the least, thus far.

Regardless, the key element to the loan program (it’s hilarious to even call them “loans”) is the idea that the loans can be forgiven. After all, if given the choice to pay back your loan or have the government forgive it, which would you choose?

Exactly. And that’s why “smoothing the forgiveness process is critical for the program to succeed,” according to Reuters. But the program is that the government hasn’t issued any guidelines and exactly how to go about getting the loans forgiven. 

Plus, we think this will likely mean the obvious: we’ll have fraud from both people who received the loans and from those who will eventually turn back to the government to have them “forgiven”. 

Paul Merski, an executive at the Independent Community Bankers of America said: “Probably every PPP borrower expects their loan to be forgiven, but it is not that simple. There are rules and regulation to consider. So the borrower best have their information and paperwork in order.”

Ah, yes. The rock-solid compliance step of good old fashioned paperwork. 

The terms of forgiveness for the loans are relatively simple:

“…borrowers must spend 75% of the loan on payroll costs, such as salaries, tips, leave, severance pay and health insurance, within the first two months. The remaining 25% can be spent on other running costs, such as rent and utilities. Money spent on non-qualifying expenses must be repaid at an annual rate of 1% within two years.”

But trying to come up with partial forgiveness sums will be difficult, banker say. There are plenty of grey areas, including what happens when employees have to be rehired and how (inevitable) misuse of funds will be tracked and punished. 

Recall, yesterday, we reported that preliminary inquiry into loans granted under the Paycheck Protection Program (PPP) has revealed early signs of fraud among businesses seeking funds.

Chris Giamo, head of the commercial bank at TD Bank in New York said: “I do think it could become a little bit complex, because with every answer there’s another question.”

The Treasury Department hasn’t even gone as far as making one standard forgiveness form, which banks are now pushing for. And banks don’t really seem to want to even be a part of the equation.

David Pommerehn, general counsel of the Consumer Bankers Association said: “From a banking perspective, we are really acting as a middleman here. We don’t want to carry these loans on our books. We see this as potentially a bigger mess than the funding process.”

Business owners are confused, too. Josh Mason, founder of Maryland catering company Vittles Catering, said his bank warned him about eligibility for forgiveness, saying the process was “not yet clear”. 

“I have read all the guidelines, but I wouldn’t be able to say exactly how much will be forgiven and not forgiven. I think that ambiguity is going to create a little bit of a mess when all of this comes to a close,” Mason concluded.

Meanwhile…